Hedge Funds Presentation Final

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*connectedthinking
PricewaterhouseCoopers LLP 

Global alternative investments seminar*

Hedge Fund Breakout - Introduction
4 June 2009

Lachlan Roos – UK Tax Hedge Fund Leader


Hedge Fund Breakout - Introduction

The year in review

An id it all….
ea sa
lin d ss
There were victims….
ad
hewhere are al now?
The So we
wa
ys
th
e
wi
nn
er
s!

4 June 2009
PricewaterhouseCoopers LLP Slide 3

Agenda/Contents

Hedge Fund Remuneration Planning
Malcolm Collings – Human Resource Services Tax

AIFM Directive
James Greig – PwC Legal
Mark James – Business Recovery Services

UCITS III for Hedge Funds?
Elizabeth Stone – Investment Management Tax
Sally Cosgrove – Investment Management Assurance

Q&A

PricewaterhouseCoopers LLP


Remuneration Planning

Malcolm Collings – HRS Tax



Broad recap for employees and partners
Our planning ideas
If all else fails


Hedge Fund Remuneration Planning - Key Announcements

Income tax rates increase to 50%

• Income tax will increase to 50% for employees/partners with income over
£150,000

• Personal allowance will be reduced for employees/partners earning over
£100,000 so that it is eliminated over £112,950

• CGT left at flat rate 18%

4 June 2009

Hedge Fund Remuneration Planning – Other Issues

Internationally mobile executives

• Increase in tax rates means RNOR and detached duty relief more valuable

• Lease premium arrangements for 10 years or less entered into after 22
April 2009 no longer effective

• Minor changes to remittance basis

• Personal allowances available to non-residents available by reason only of
being Commonwealth citizens may no longer be claimed on that basis after
5 April 2010

• Dividends from overseas shares taxable at new rate up to 42.5% (as
opposed to 50%)

4 June 2009


Pensions

• Relief for pension contributions reduces for individuals with taxable income
over £150,000 per annum
• For individuals with taxable income over £180,000 relief worth only 20%
• Special annual allowance charge of 20% prevents significant accelerated
contributions
• Employer Contributions included in analysis therefore restrictions on usage
of :
- Salary Sacrifice Vehicles
- IPP’s
• Possible alternative mechanisms :
- Deferral using employee benefit trust;
- EFRBS

4 June 2009


Leaving The UK
Comparative Tax Analysis post budget (% Net Income Receipts)

Rank Location % Net Income
1 Dubai 95%
2 Hong Kong 85%
3 Singapore 83%
4 Guernsey 80%
5 Switzerland (Zurich) 68%
6 Japan (Tokyo) 62%
7 Germany (Frankfurt) 60%
8 USA (New York State and City) 60%
9 France (Paris) 58%
10 UK (London) from 2010 56%

** based on Married Executive with 2 children earning £250k

4 June 2009


Anti-avoidance and compliance

• Senior accounting officers of major corporates will be required to
certify that adequate controls in place to prepare accurate tax
calculations

• HMRC will publish a list of planning arrangements it considers do not
work

• Naming and shaming of companies and individuals who have
deliberately understated tax of £25,000 or more

• New penalty regime introduced from 6 April 2010

4 June 2009


Impact on Reward in Alternatives Sector

• Possible planning opportunities

- Income deferral
• Use of employee benefit trust
• Use of family benefit trust
• Loan arrangements

- Income acceleration
• Pay 2009 bonuses prior to 6 April 2010
• Accelerate vesting on LTIPs (possibly subject to continued forfeiture
risk)
• Take money from deferral arrangements prior to April 2010

4 June 2009


Impact on Reward in Alternatives Sector

• Possible planning opportunities (continued)

- Delivering capital gains.
• Convert RSUs to restricted securities taxable immediately
• Tax efficient LTIP using HMRC approved company share option plan
• Joint ownership in shares
• Special classes of shares
• Contracts for differences

4 June 2009


Planning for Employees

• Movement to Limited Liability Partnership (LLP) Structure
• Pension planning is not dead
• Acceleration of remuneration
• Income to capital
- Equity packages
- Phantom equity packages
- Debt packages

4 June 2009


Planning for Partners

• Pension planning is not dead
• Corporate partner planning
• Acceleration of profit share at 41% tax rate
• Passing on the NI saving
• Income to capital
- Equity packages
- Phantom equity packages
- Debt packages

4 June 2009


AIFM Directive

Mark James – Business Recovery Services


AIFM Directive

The AIFM Directive

Who is caught?

• Any person who manages an Alternative Investment Fund (AIF)
• AIF defined as:
“any collective investment undertaking, including compartments thereof
whose object is the collective investment in assets and which does not
require authorisation as a UCITS”
• So it catches:
o Hedge Funds, Venture Capital Funds, Real Estate Funds, Infrastructure
Funds;
o REITs, JPUTs, PCCs;
o Carried interest vehicles, Investment Companies, etc.

4 June 2009

AIFM Directive

The AIFM Directive – Size thresholds and exemptions

Managers of AIFs where, in aggregate, either:

• Assets under management (if gearing is used) are less than €100m;

• Assets under management do not exceed €500m, where no leverage is
used and investors are subject to 5 year lock in from initial constitution;

• Managers who manage only funds which are not domiciled in the EU,
provided the funds are not marketed into the EU;

• EU banks, insurers, pension funds and sovereign wealth funds.

4 June 2009

AIFM Directive

The AIFM Directive
Key provisions of the Directive (1):
Managers:
• The only entities in the EU permitted to manage an AIF which is to be sold
in the EU will be managers whose registered and head office are in an EU
member state;
• Qualifying AIFMs will be able to take advantage of a passport to provide
services and market their AIFs across Europe;
• Qualifying AIFMs will have to meet stringent requirements regarding:
o regulatory capital; and
o systems and controls, and risk management and reporting requirements and
• Qualifying AIFMs will need to appoint:
o EU resident custodians/depositaries;
o Valuers; and
o EU qualifying auditors.

4 June 2009

AIFM Directive

The AIFM Directive

Key provisions of the Directive (2):
Prohibitions and requirements:
• Qualifying AIFs can only be sold to MiFID qualifying professional investors
within EU;
• Managers not resident in the EU may not be authorised under the Directive
but may, subject to stringent conditions – see below – get a licence to
market;
• The ability of qualifying AIFMs to delegate service provision outside the EU
is limited;
• An ordinary EU resident MiFID authorised investment firm NOT authorised
under the AIFM Directive may NOT market shares in an non-qualifying AIF
or (worst case construction) provide any management services to an non-
EU AIF!

4 June 2009

AIFM Directive

Possible Fund Structures and the Implications of AIFM Directive

Scenario 1 – EU Fund / Manager

Fund Administration / Prime
Brokerage / Custodian

$

Fund
UK Manager Fund Service Custodian
(EU) Provider (UK)
(Dublin)

$

Fund Management


AIFM Directive


Scenario 2 – Offshore Fund / EU Manager

Fund Administration / Prime
Brokerage / Custodian

$

Fund
Fund Service
UK Manager
(Cayman) Provider
(Dublin)

$

Fund Management

Fund
Service
Provider
(Cayman)


AIFM Directive


Scenario 3 – Offshore Fund / Manager
Fund Administration /
Prime Brokerage /
Custodian

$

Fund
US/Offshore Fund Service
Manager (Cayman) Provider
(Cayman)

$

Fund Management

US/Offshore
Manager


AIFM Directive – Hedge Funds & Insolvency

The headlines you don’t want to see

4 June 2009


Weavering Macro Fund Limited (in liquidation)

Facts

• Liquidity constraints following redemptions late 2008
• Fund insolvent: liquidators appointed 19 March 2009
• US$637m of the US$500m NAV was an interest rate swap with a related
party
• SFO arrests 15 May 2009
• Investigations continue

4 June 2009


Lessons learned

Ordinary Due Diligence would have raised questions

• Published Report and Accounts held warning signs
• Heavy cash outflows vs. steady NAV increases
• IRS disclosed in list of investments
• Already dominant by 2007

4 June 2009


Elizabeth Stone – IM Tax
Sally Cosgrove – Assurance



UCITS III Launches

4 June 2009


UCITS III – an appropriate vehicle for hedge funds?

• Permissible investments (old)
- covered options
- futures
- currency forwards
• Permissible investments (UCITS III)
- Swaps (including TRS)
- CFDs
- credit default swaps

4 June 2009


What is possible / not possible under UCITS?

AUTHORISED FORBIDDEN
• Short position through derivatives; • Direct short sales;
• Closed end listed alternative funds;
• Regulated open end alternative • Open end alternative funds.
funds within trash ratio;
• Direct investment in commodities;
• Derivatives on commodities indices.
• Derivatives on commodities;
• Certificates on ineligible assets if no • Certificates embedding derivatives
embedded derivatives; on ineligible assets;
• CSS on loans with cash settlement; • CDS resulting in kind settlement;
• 100% leverage through derivatives; • Leverage from borrowing;
• Liquid portfolio. • Illiquid portfolio.

4 June 2009


Investment restrictions and risk diversification

Certificates on commodities reflecting the performance of 10% per issuer
CORE PORTFOLIO

an underlying commodity 1:1

Derivatives on diversified commodities indices or on If counterparty risk is limited to 5-10%
diversified indices of commodities futures
Derivatives on non sufficiently diversified indices (if no high Maximum 10% to a given index (application of 5-10-40%
exposure to the index) rule)

Listed closed-end funds (including SIFs) 10% per issuer
Securities of companies whose principle income derive 10% per issuer
from a given commodity

Unlisted closed-end funds 10% (together with total unlisted
holdings and open-ended funds)
TRASH

Open-end alternative funds (if 10% together with other unlisted
supervised and supervisory investments
Trash ratio:
cooperation) maximum 10%
Open-end SIFs 10% together with other unlisted
investments

4 June 2009


UCITS III – an appropriate vehicle for hedge funds?

Equity hedge 
Long short (130/30) 
Relative value 
Global macro 
Equity long/short 
Distressed debt 
Fixed Income Arb 
Emerging markets 
Event driven 

4 June 2009


Growth in their distribution footprint

Registrations UCITS I UCITS III
55.000

50.000 55.680
13% growth last
45.000 9 months
40.000
35.000 78% growth last
3 years
30.000
24.900
25.000
65.000 round trip
20.000
registrations
15.000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Sept
2008

Source: PwC 2008 Global Distribution Poster

4 June 2009


Current “Hot spots” for fund distribution

Top regions for Country
new registrations of sale
New registrations
Total Registrations New registrations 2007
Q1- Q2 2008

Europe Germany 4.923 561 + 152

Eastern Europe Czech Republic 802 292 + 75

Middle East Bahrain 908 46 + 17

Asia Singapore 1.824 515 + 175

Americas Chile 1.216 774 ?

Africa South Africa 112 19 ?

Source: PwC 2008 Global Distribution Poster

4 June 2009


Onshore vs offshore funds - key considerations

• Regulatory regime

• Valuation, Reporting and disclosure requirements (including track record)

• Set up costs

• Marginal costs

• Tax treatment of fund (capital taxes, WHTs, direct taxes)

• Tax treatment of UK investors (marginal rates of income/capital gains tax)

• Tax treatment of other target investor groups

4 June 2009


Taxation Onshore Offshore

Funds
Investment • Investment income taxed at • Income and gains exempt at fund level
20%
• Gains exempt
• TEF regime – all income/gains
exempt

Trading • All trading profits taxed at 20% • Trading profits exempt
unless “white list applies –
investment income taxed at 20%
exempt if “white list” applies
HNWI Investors Qualifying Non-qualifying

Distributions • Equity Dividend – 25%* (36%) annually NA

• Interest Distribution – 40% (50%) annually

Redemptions • Gain on redemption – 18% 40% (50%)
(Deferral but taxed as income)

Preference NA Qualifying Fund – 32% differential on gain
4 June 2009


Taxation Onshore Offshore
Funds
Investment • Investment income taxed at 20% • Income and gains exempt at fund level
• Gains exempt
• Investment income distributable or reportable
exempt • Gains exempt (and neither distributable or
reportable)

Trading • All trading profits taxed at 20% Trading profits exempt
unless “white list applies –
investment income taxed at 20%
• All trading profits are distributable or reportable
• TEF regime – all income/gains unless the fund is equivalent to an UK AIF and white
exempt if “white list” applies list applies

HNWI Investors Qualifying Non-qualifying
Distributions • Equity Dividend – 25%* (36%) annually NA

• Interest Distribution – 40% (50%) annually

Redemptions • Gain on redemption – 18% 40% (50%)
(Deferral but taxed as income)

Preference NA Qualifying Fund – 32% differential on gain

4 June 2009


Distributor Status vs Reporting Fund Regime

UK Distributor Status Reporting regime
Annual retrospective certification Advance certification of fund – increased investor certainty?
of status by HMRC

Annual calculation of UK Annual calculation of UK reportable income (similar to current UK equivalent profits,
equivalent profits with reliance on IAS and IMA SORP principles)

Status required for entire Investor election
investment period

Annual cash distribution of 85% Funds required to report 100% of income, rather than to physically distribute
of income required

Investor taxed on cash Investors taxed on higher of reported income and distributions
distribution

Investment restriction No investment restriction
Fund of funds - computational adjustments?

Equalisation Equalisation?

Statutory discretion re breaches Breach provisions

4 June 2009


Onshore and offshore
Impact of Authorised Funds Statement of Recommended Practice
Onshore Offshore
Application • Preparation of the annual and half • For those funds distributing in to the UK is
yearly report and accounts of all used to determine amounts as revenue or
authorised funds capital for the purposes of distributing in to the
• Determines amounts as revenue or
UK (reportable income under new regime)
capital for the purposes of distribution
of income property of the fund and
taxation

Impact: Interest from debt securities is recognised on an effective yield basis by reference to the
Interest from debt purchase price.
securities Those securities purchased at a discount recognise an amount of interest greater than the
coupon over the life of the debt security.
Those securities purchased at a discount recognise an amount of interest greater than the
coupon over the life of the debt security.

Impact: Where positions are undertaken to protect or enhance capital, and the circumstances support
Derivatives and split of it, the returns are capital.
returns between revenue Where positions are undertaken to protect or enhance revenue, and the circumstances support
and capital it, the returns are capital.
When positions generate total returns it will generally be appropriate to split returns between
revenue and capital.

4 June 2009


Q&A

This publication has been prepared for general guidance on matters of interest only, and does not constitute
professional advice. You should not act upon the information contained in this publication without obtaining specific
professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness
of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP,
its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any
consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this
publication or for any decision based on it.

© 2009 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the
PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and
independent legal entity.


Hedge Funds Presentation Final

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